Imágenes de páginas
PDF
EPUB
[ocr errors][ocr errors]

Mr. PECORA. Which were collaterized by stock of the bank? Mr. MILLS. I could not state the number exactly. There was a very substantial amount of them. That amount was later increased by relief collateral. The officers of the bank were instructed, when the collateral back of a loan became low, to go out and get more collateral, and a substantial additional amount of relief collateral was brought in in that way, of the Detroit Bankers Co.

Mr. PECORA. After the formation of the Detroit Bankers Co. and the acquisition by it of the capital stock of these five original unit banks, which included that bank, was not this process of loaning money on the stock of the Detroit Bankers Co. tantamount in substance to the bank loaning upon its own stock?

Mr. MILLS. No, Mr. Pecora; I would not agree with that at all.
Mr. PECORA. Why not?

Mr. MILLS. The Detroit Bankers Co. had other very substantial investments. They owned stock, all the stock-or substantially allof the Detroit Trust Co. They had the First Detroit Co. There was a very substantial amount of other assets that the Detroit Bankers Co. owned outside of the bank.

Mr. PECORA. But the Detroit Bankers Co.'s principal assets consisted of the capital stock of the banking units?

Mr. MILLS. Its principal stock, yes; but not the only assets.

Mr. PECORA. What proportion of its assets consisted of stock of other companies or units?

Mr. MILLS. If you include the Detroit Trust Co. as a bank-
Mr. PECORA. I am. It did a banking business, did it not?

Mr. MILLS. That may be a legal question. I presume it did; but it is a legal question. I do not know.

Mr. PECORA. Lest there be any doubt about it, in the annual reports of the Detroit Bankers Co., which contain a combined statement or balance sheets of all the banking units, so called, was there not included the balance sheet of the Detroit Trust Co.?

Mr. MILLS. Oh, yes.

Mr. PECORA. So that the Detroit Bankers Co. regarded the Detroit Trust Co. as one of its banking units?

Mr. MILLS. Obviously I would think that would follow.

Mr. PECORA. That being the fact, namely, that the principal assets by far of the Detroit Bankers Co. being the capital stock that it owned of its unit banks, when these unit banks made loans on stock of the Detroit Bankers Co. they were in substance, if not in form, making loans virtually upon the security of their own stock, were they not?

Mr. MILLS. I will say no, for two reasons, Mr. Pecora. In the first place, there were very few loans made. In fact, I only know of one or two loans that were made in my day on Detroit Bankers Co. stock. Most of the loans, as I have tried to explain, were made on stocks of the constituent banks, which were later exchanged for Detroit Bankers Co. stock, and at the time of the consolidation it was approved by the comptrollers' office. Secondly, I have always understood that there was an opinion from the Attorney General of Michigan-I have never seen it-who stated they were very different things.

Mr. PECORA. I am asking you to ignore form and consider substance in this questioning, Mr. Mills. I appreciate the differences in

form and substance, but I will ask you if it is not the fact that in substance these unit banks of the Detroit Bankers Co. that had loans collateralized by stock of the Detroit Bankers Co. were in effect, although not in form, having those loans collateralized by their own capital stock.

Mr. MILLS. They were not originally made that way.

Mr. PECORA. Whether they were made that way originally or not, the fact is that when those loans found their way into the unit banks of the group, in effect that is what they were-loans collateralized by the stock of the bank?

Mr. MILLS. I am afraid that I am too much of a lawyer to disre gard form entirely.

Mr. PECORA. That is one of the weaknesses of lawyers.
Mr. MILLS. It is.

Mr. PECORA. They place more stress on form than they do on substance.

Mr. MILLS. Very frequently.

Mr. PECORA. It is a happy thing to notice that the United States Supreme Court only very recently saw fit to cut through form and consider substance.

Mr. MILLS. I was delighted to see that decision.

Mr. PECORA. I hope the legal profession will follow in the wake of that decision.

When you became the executive head of the bank in 1932, the fact that the bank found itself with this heavy concentration of Detroit Bankers Co. stock presented a problem to you, did it not? Mr. MILLS. It did, sir.

Mr. PECORA. What were the essential features of that problem as you recognized it to be a problem?

Mr. MILLS. I recognized the problem that there was too much of a concentration of loans in the bank predicated upon Detroit Bankers Co. stock to be, in my view, good banking practice. Please understand that I do not wish to blame any predecessor or anybody connected with the old banks. That is not the purpose of my statement. But I recognized that due to these consolidations, in my judgment there was too much concentration of Detroit Bankers Co. stock. We also had too much concentration of various stocks of various other corporations; and the officers were instructed to do what they could to lessen those concentrations.

Mr. PECORA. That is what I was coming to. What was done by you as the chief executive officer of the bank to solve the problem when you found yourself confronted with that particular problem. Mr. MILLS. First, I recommended to the board or to the govern ing comimttee that we make practically no more loans upon Detroit Bankers Co. stock.

Mr. PECORA. That did not solve the problem itself. You still found the problem there, did you not? You simply resorted to methods which prevented the aggravation of that problem?

Mr. MILLS. That is only one of the things I did. I do not wish to have the problem aggravated. It was already a severe problem. Secondly, the officers were instructed to do everything they could to have the Detroit Bankers Co. stock substituted by other collateral. Mr. PECORA. Was that done? Was anything done along those lines?

Mr. MILLS. Reports were made to me from time to time. UnforAltunately, I do not think that a tremendous amount of progress was made, because a large part of the wealth of Detroit was represented by bank stocks.

[ocr errors]

Mr. PECORA. Was any progress at all made along that line?
Mr. MILLS. Oh, yes.

Mr. PECORA. Was there a reduction of that concentration of collateral from that time on?

Mr. MILLS. Please do not misunderstand me. I stated or interpolated in my statement this morning that the amount of collateral held by the banks in the Detroit Bankers Co. stock actually increased. That increase came about where loans became dangerously low or "under water" or where we could not get out of these loans, when the debtors could not pay and we insisted on more collateral, and all they had was Detroit Bankers Co. stock, and we took it in to sweeten the loan.

Mr. PECORA. To that extent the solution of one problem of undercollateralized loans was practically checked by an aggravation of another form, namely, that of increasing this concentration of Detroit Bankers Co. stock?

Mr. MILLS. Oh, no, Mr. Pecora; because if a man had nothing else, certainly it did not harm our position to take in more Detroit Bankers Co. stock.

Mr. PECORA. Taking more of the Detroit Bankers Co. stock did not relieve the problem that was existent because of the presence of that heavy concentration of Detroit Bankers' Co. stock?

Mr. MILLS. No. We had two problems-more than two; but two of them were that some of these loans became under-collateralized. Other securities became under-collateralized, and it was to sweeten them that the Detroit Bankers Co. stock was taken as relief collateral. Mr. PECORA. Let us pass on to the next paragraph in your prepared statement, which reads as follows, referring to another problem [reading]:

The Detroit Bankers Co. had obligated itself to pay some $7,000,000 of debts of subsidiaries and had directly borrowed funds in the neighborhood of an additional million dollars to acquire compete ownership of seven small banks in one country.

The obligation of the Detroit Bankers Co. referred to therein was this obligation that was incurred or had been incurred by the First Detroit Co.?

Mr. MILLS. The First National Co., I believe.

Mr. PECORA. That is the indebtedness of $7,200,000 that has already been referred to in the evidence here?

Mr. MILLS. That is the item that I first referred to, of some 7 millions of dollars. My recollection is that the Detroit Bankers Co. had directly borrowed $1,000,000 mentioned in the second portion. Mr. PECORA. The third problem specified by you in your prepared statement is referred to as follows [reading]:

A subsidiary of the Detroit Bankers Co. had acquired partial ownership of some 10 banks throughout the State of Michigan.

Which subsidiary was that?

Mr. MILLS. I was informed, the First National Co.

Mr. PECORA. Which were the 10 banks alluded to in that statement?

175541-34-PT 12-4

Mr. MILLS. I saw your chart this morning, on the wall, and I presume it is correct. I do not know the names of them all. There was a bank at Alpena, a bank at Bay City, one at Saginaw, at Lansing, and various places.

Mr. PECORA. Another one of the problems referred to by you in your prepared statement is set forth as follows [reading]:

The bank had outstanding large amounts of loans predicated upon the slowest types of security but, to individuals who were considered good financial risks. Also some of the constituent banks had incurred employee ownership of stock, and upon a declining market many officers and employees as well as others became involved.

Now, with reference to the first portion of that statement, the fact that the bank had outstanding large amounts of loans predicated upon the slowest types of security, what were the loans you referred to therein, and what were the slow types of security that you allude to?

Mr. MILLS. A loan may have been made that was collateralized by a mortgage, which is an exceedingly slow type of security, but if it is a good risk it should be a good loan.

Mr. PECORA. Do you know what was the aggregate amount at the time you became the chief executive officer of the banks of those loans?

Mr. MILLS. The mortgage account direct was in the neighborhood of $150,000,000. They had other loans on real estate of—well, it would be a substantial amount. I don't know.

Mr. PECORA. These mortgage loans at their best are a slow type of security, are they not?

Mr. MILLS. Slow, but the best in the United States, Mr. Pecora, in my judgment.

Mr. PECORA. I was just merely discussing for the moment the fact that mortgage loans are at their best a slow type of security. Mr. MILLS. Yes, sir.

Mr. PECORA. In 1932, when you became the chief executive officer of this bank, would you say that that security represented the best in the United States?

Mr. MILLS. Ultimately I think by and large; yes. Mr. Pecora, we had in that bank over 50,000 different mortgages. They had been made to Tom, Dick, and Harry. By that I do not mean using the term loosely, but made to employees or people to build homes. The average mortgage was only $2,800. A man will hang onto his home longer than he will hang onto a security. He will hang onto it longer than he will hang onto stocks or automobiles or anything, in my judgment. That is why I believe those mortgages were so darned good.

Mr. PECORA. But in 1932 did you consider that those loans secured by those mortgages represented loans secured by the highest type of security in the United States?

Mr. MILLS. Outside of Government bonds, yes; or obligations col lateraled by Government bond, yes; because I do. They are the backbone of the country.

Mr. PECORA. To what extent had real-estate values in Detroit and its environs depreciated since 1930?

Mr. MILLS. It depends on the location.

Mr. PECORA. Well, generally speaking, referring to real-estate values generally?

Mr. MILLS. Possibly 30 or 40 percent. That is for an immediate sale. These mortgages, you understand, were made with savings funds which did not contemplate immediate throwing on the market. Mr. PECORA. Which does not make the security any better, does it? Mr. MILLS. I don't understand you.

Mr. PECORA. I mean, it did not protect those loans against the depreciated values of the real estate when that depreciation occurred? Mr. MILLS. I am sorry-I am awfully sorry.

Senator COUZENS. Read him the question again.

The SHORTHAND REPORTER. Which does not make the security any better, does it? I mean it did not protect those loans against the depreciated values of the real estate when that depreciation occurred?

Mr. MILLS. My only answer to that is that I think a man's homenot only these but practically all of them-not all of them, but practically all-he will hang onto it and pay his principal, pay his interest anyway and his principal when he can.

Mr. PECORA. If he can?

Mr. MILLS. And when he can.

Mr. PECORA. But the fact that they were made originally to encourage home building, if you please-and I take it that is the thought you want to leave here?

Mr. MILLS. To provide homes, not to encourage it. To take care of this problem that had been brought to Detroit.

Mr. PECORA. Yes-did not protect thost loans against the ravaging effects of the depreciation in real estate which you say had taken place in the amount of 30 or 40 percent since the beginning of 1930? Mr. MILLS. There is this additional thing which, so far as my knowledge goes, was rather peculiar of Detroit and the old banks of Detroit. The old banks in Detroit had put in a rule, clearinghouse banks had put in a rule, I believe it was in the neighborhood of 1926, but that is my impression only, requiring amortization of mortgages, requiring 10 percent a year, or 22 percent on principal be paid quarterly on the mortgages, and I know of countless mortgages in that institution that had been reduced from the original amount to practically nothing. I know some had been reduced to as low as $5 and kept there.

So when you compare the decline in market values of real estate, also bear in mind that many of these-it should be borne in mind that many of these-mortgages had been exceedingly well amortized and had been paid down from the initial amount of the mortgages. Mr. PECORA. To what extent had that operated to reduce the original mortgage indebtedness secured by these?

Mr. MILLS. I never saw any figures on the total, but I kept after the mortgage officers and mortgage end of the bank. One of the jobs I had was to continue to insist with them that they must weigh those amortization payments upon the principal of only in as few cases as they could; that we desired to keep the mortgages being paid down.

Mr. PECORA. With the experience that has come to you as the execntive head of this bank would you say as a banker that these mortgages are a good security for commercial banks to carry against loans?

« AnteriorContinuar »